Think of your monthly budget as a road map that will lead you to the goals you want to achieve – whether that’s to go on a trip of a lifetime, saving up for your dream home, or something as simple as saving up for a gift to yourself for all your hard work you’ve been doing with FI Builder.
You may end up being surprised by how much, and where, you are spending your money.
If you follow my plan, you should be able to whiz through your monthly budget in 5-10 minutes once you’ve got the hang of it. It’s like riding a bike, once you master it, you’ll do it with ease. My bet is that you eventually nerd out a bit and become invested in wanting to know where your hard earned money is going every month. So – let’s build a plan together.
Step 1 – Set your Spending Categories
We need to organize your spending into categories to find out where your money is going. Below are the categories that I tend to use;
- Mortgage / Rent
- Groceries
- Transport costs (bus fare, petrol, taxis, trains, Uber, etc.)
- Insurance (house, health, car, phone, etc)
- Utilities (water, gas, power, etc)
- Wifi
- Phone bill
- Eating out (some people may like to split eating out and alcohol)
- Subscriptions (Netflix, Spotify, Apple storage, etc. Include ALL your monthly subscriptions)
- Health and beauty (toiletries, contact lenses, dentist fees, prescriptions, gym membership, yoga, etc)
- Shopping (clothes, electronics, random other things)
- Gifts
- Holidays (hotels, flights, car hire, eating out, drinks, activities, etc)
- Add in any other category you find relevant.
Now I want you to think of a reasonable estimate for each spending category. Write down that number beside each category. Don’t just guess a number, break it down to obtain a realistic estimate. Now total up your monthly estimate for ALL categories.
We now know how you think you are spending your money. Good work!
You might be wondering, what about the amount of savings I have left over after all of this spending? We will cover that in another post – follow this link (*not yet posted*).
STEP 2 – Categorizing your prior spending
A very important exercise, as noted in the initial boot camp blog post, is looking at your historical spending habits. Your previous spending is an excellent indicator of what your future spending will mirror.
There are some great apps that help you categorize all your spending. Perhaps your banking app allows you to do this, and maybe your credit card app as well. If you use multiple debit or credit cards like I do, then looking at several apps or statements can be a pain as it simply takes too much time. “Work smarter not harder”, as my Dad would always say.
Some good apps to use are below;
UK – Snoop App
Canada – Mint, Pocketsmith
These apps allow you to connect all your bank accounts and credit cards and consolidates all your transactions/spending in one place. You MUST ensure you add ALL your bank accounts and credit cards, otherwise we will be missing a piece of the puzzle. After categorizing your spending for an entire month, write down the amount spent for the category beside your spending estimate from Step 1.
IMPORTANT – you must go through the transactions and re-categorize as the robots behind the app can categorize the odd expense incorrectly. You should also ensure no inter-account transfers are being categorized here.
Why use this tool? The point of using the apps is AUTOMATION. I’m building this program for people who can quickly and efficiently monitor their financial well-being by giving 15-20 minutes of their time at the end of every month. If it’s not convenient and easy, most people won’t bother, so make it easy on yourself.
*I am currently looking at various other apps. As I test these, I will update the post to give you various options.*
If you are old school (nothing wrong with that) and you want to skip the apps, you are more than welcome to go through your statements manually and add up each category on an Excel spreadsheet or calculator. Ideally, make it easy to repeat each month by setting up a template.
Step 3 – Compare your Actual Spend vs Budgeted Spend – After completing step 2, you will have a breakdown of what you spent in previous months for each category. Compare your “Estimated monthly spend” from Step 1 to your Actual Monthly spend in Step 2. Hopefully you are not too shocked. The first time I did this, I couldn’t believe how much money I spent at restaurants and pubs!
I always tell my friends and family to complete this exercise for an entire year if possible. It takes quite a bit of time, but you will benefit from seeing your ANNUAL spending on each category so you can evaluate if you need to adjust your spending habits. If you can’t do a full year, then try and go back 3 months. 3 months is a long enough period to see some patterns in your spending.
How did your estimate compare against your actual spending? Was it higher? Lower? Talk through your budget with your partner or family to make sure everyone is on the same page. Identifying your needs vs wants is a self-confronting exercise – be as truthful with yourself as possible.
Go back to your estimated budget in Step 1 and amend it where needed.
Step 4 – REPEAT, REPEAT, REPEAT
We become what we repeatedly do. Perform this budgeting exercise EVERY. SINGLE. MONTH. You’ll get better and better at this process each time you complete it, and likely learn something new.
Step 5 – HACK YOUR BUDGET
Once you feel comfortable with Steps 1-4, let’s start to think about where we can make improvements.
Throughout the month, try and monitor your spending against your targets. Make a game out of it. How? Maybe you have set a budget of $200 for Eating Out, and perhaps $200 on Transport. Challenge yourself to spend less in ways that BENEFIT you. For example, can you cut down on your transport costs by driving less, taking public transport more, or perhaps eliminating the cost entirely by cycling? If so, I like to take those “Savings” and add them to my “Eating out” budget. If by chance I know I’ll be going out for dinner and drinks more than expected, maybe I can reduce my transport budget to compensate for that.
The point is that you can HACK YOUR BUDGET in different ways. You can bring lunch to work to save on eating out costs, and maybe you don’t need 3 different audio streaming services. Try to analyse a different category each month.
Assess your spending and its importance in your life, that is the key takeaway. Spend purposefully.
STEP 6 – RE-EVALUATE
Congratulations – you’re now a budgeting wizard. You have taken control of your spending and know exactly where your hard earned money is going. My whole motivation for taking control over my budget is to ensure I am spending money on things that make my life better AND to know I am on the right path to achieving my own financial goals.
Continuously revisit your budget to see if you can improve your spending habits. If you have a moment of weakness and go off course one month, don’t beat yourself up – it happens. Have fun along the way, this process shouldn’t be seen as “sacrificing” or living life without.
Thanks for reading and I hope the plan above is useful to you. If you need help along the way, send me a message and I’ll try my best to give you some advice.
Best,
FI BUILDER